What to Look For When Choosing a Construction Lender

November 5, 2020 - Your relationship with your bank is one of the most important professional connections you can develop as a business owner. But that relationship is about more than their ability to secure funding.

Joel Newby, CPA, Audit Partner, and Client Manager at Redpath, says your construction lender should be a reliable source, both in economic downturns and times of plenty. He says some banks simply have not worked with enough construction companies to understand the process or cash flow nuances unique to the space.

Wes Anderson, Managing Director, Commercial Banking at BMO Harris, works with construction companies and agrees with Joel's assessment. If your bank doesn't have the experience and resources to serve your business's unique needs, it might be time to find a new one.

We asked Joel and Wes for their insight into the signs of a great banker/contractor relationship and how to find the right banker for your company.

Why a Great Construction Lender is Hard to Find

The clearest obstacle between a construction firm and a bank occurs when the construction company feels the bank doesn't really understand their business. Wes says that from a banking perspective, the construction industry is unique from others.

"It's very nuanced," he says, including an entire vocabulary specific to construction. He says he spends time on his clients' job sites to learn their businesses: Overbillings, underbillings, percentage of completion, fixed price contracts, pick-up-and-go work, engineer’s estimates, change orders, captive insurance, P3, Chase Level III – even the subtleties of construction cash flow and payroll – are all familiar to construction finance leaders, but it takes time and personal interfacing for bankers to build that vernacular. 

Look for an Advocate with Access

While shared vocabulary can be an indicator of affinity, a healthy banker/contractor relationship is about a deeper understanding of the construction industry, real advocacy for your business, and access to key decision-makers.

"Everyone wants to bankroll somebody in a boom," Joel says. "When things tighten up, you need to be with a banking partner who can work with the credit committee to make sure you receive the credit you need."

From Wes's perspective, being the right fit for a construction company is about being able to take care of as many unknowns as possible. "Contractors' skillset is solving problems quickly and following them through," he says, "and they want that from their relationship with their bank, too. [They] want a banker with decisiveness and authority to themselves" – a trusted resource they can count on to not just solve problems, but create new opportunities for companies to get value out of their banking relationship.

When a bank is too small to fulfill your lending requests, their willingness to participate with other banks to fund the loan can be a testament to their commitment to your company. Joel says that sometimes, small banks are "nimble in ways big banks aren't," though it's not always a function of size. "It's just a matter of [a bank's] ability to respond quickly to requests for credit."

Ask These Questions to Find the Right Construction Lender

Knowledge of your business is the strongest way a banker can differentiate themselves. If you're looking for a new construction lender, Joel and Wes both say it's probably because your bank has shown they don't have adequate industry expertise, so you might feel they can't go to bat for your company when times are tough.

Joel brings up a scenario in which a contractor grows and the bank "doesn't know how to communicate the value of holding onto that client," leading to misunderstandings, a lack of trust, and a broken relationship.

Whatever the reason you're looking for a new construction lender, you can gauge their readiness and knowledge during your conversations with prospective banks. Both Joel and Wes recommend asking these questions during the interview process:

• "How many contractors do you work with?" Look for experience in construction applications like yours and outside of your own space, as well. If they can share references, ask for them – then ask those references about their experience with that bank. "Did [the contractor] get put in the [bank's] work out group because they were downsizing their construction portfolio?" Joel posits. "Or did the bank step up for their construction client when times were tough?" As Wes puts it, "Every contractor loses money once every ten years. That's when their bank's reputation comes to light."
• "What's your approach to participation?" A bank that's willing to participate to fund a construction loan probably has a better understanding of the nature of the industry – the cycles and global trends that can influence your cash flow and revenue.
• "What is your access to the credit committee?" The size and structure of your bank could mean your banker – the actual person you talk to about loans and funding – is within just a few key levels of their credit committee, the people responsible for determining the bank's ability to take on your request for credit. They could also have no direct line to the committee at all, and can't strongly advocate for your business when your request comes through.
• "Can you refer a CPA with construction expertise?" A banker that understands the construction business knows the importance of having a financial advisor with the same level of understanding. "Banks that work with construction companies are more likely to work with CPAs like that," Wes says.

Finding the right construction lender isn't a matter of finding the largest or smallest bank. Instead, look for a shared understanding of your industry and your space in it. A bank that has invested time and resources in their construction practice is better positioned to help when it comes time for renewals and presenting to credit committees.